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Jan. 10 (Bloomberg) -- Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004 as the world’s biggest bond firms bet that the economy will strengthen and demand for higher-yielding assets will increase.

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Yields on 10-year Treasuries, which serve as a benchmark on everything from corporate loans to mortgages, rose 3 basis points to 3.32 percent last week. ( ed. as demand to buy these bonds as a "safe haven"diminishes)Primary dealers forecast the yield will climb to 3.65 percent by the end of the fourth quarter, a Bloomberg News survey last month showed. Yields dropped as low as 2.33 percent on Oct. 8. Yields were little changed at 3.32 percent at 7:26 a.m. in New York.

‘Tone Has Shifted’
While rising, 10-year yields remain below their average of 5.43 percent since 1990 even though the U.S. is running a budget deficit that exceeds $1 trillion, or more than 8 percent of the economy. The last time the U.S. had a surplus, from 1998 through 2001, yields averaged 5.45 percent.

“You’re not going to see a repeat of the low yields that we’ve seen in the last six months,” said Sean Simko, who oversees $8 billion as a managing director at SEI Investments Co. in Oaks, Pennsylvania. “The overall tone has shifted. The trend is higher in yield, but it won’t be in a straight line.”

Yields on 10-year noteswill hold below 4 percent for a fourth consecutive year in 2011, according to the median estimate in a Bloomberg News survey of the primary dealers.

Some of the optimism over the recovery was tempered Jan. 7 when the Labor Department in Washington said U.S. payrolls increased by 103,000 in December, below the median forecast of 150,000 in a Bloomberg News survey

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‘Point of Equilibrium’
While last week’s jobs report fell short of forecasts, other data from the government, Fed and private sector since December showing gains in manufacturing and industrial production have prompted economists to increase their estimates for gross domestic product.

New York-based JPMorgan Chase & Co., the second-biggest U.S. bank by assets, boosted its 2011 forecast by half a percentage point to 3.1 percent. A government report on Jan. 14 will show retail sales rose for a sixth month, economists said.

“We still have headwinds, but their strength has been somewhat offset by the increase in tailwinds,” said David Ader, head U.S. government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Maybe we’ve reached a point of equilibrium.”

In the corporate debt market, investment-grade bond yields have shrunk to within 163 basis points, or 1.63 percentage points, of Treasuries, Bank of America Merrill Lynch index data show. Spreads were 181 basis points a year ago and 574 in 2009.

“You’re not seeing a lot of pushback” from investors on new bond sales, said Timothy Cox, an executive director of debt capital markets at Mizuho Securities USA in New York.